2 Summary The Patient Protection and Affordable Care Act (P.L , PPACA) was signed into law on March 23, On March 30, 2010, PPACA was amended by P.L , the Health Care and Education Reconciliation Act of This report summarizes the key provisions in PPACA (hereafter referring to PPACA as amended by P.L ) that affect private health insurance. PPACA imposes new requirements on individuals, employers, and health plans; restructures the private health insurance market; sets minimum standards for health coverage; and provides financial assistance to certain individuals and, in some cases, small employers. In general, PPACA requires individuals, beginning in 2014, to maintain health insurance, with some exceptions. Individuals will be required to maintain minimum essential coverage, which includes eligible employer coverage, individual coverage, grandfathered plans, and federal programs such as Medicare and Medicaid, among others. Employers are not explicitly required to provide health benefits, although certain employers with more than 50 employees may be required to pay a penalty if either (1) they do not provide insurance, under certain circumstances, or (2) the insurance they provide does not meet specified requirements. Several insurance market reforms will be implemented, including some prior to full implementation in 2014, such as prohibition against lifetime benefit limits and coverage for preexisting health conditions for children. In addition to establishing new federal private health insurance standards, PPACA will enable and support states creation by 2014 of American Health Benefit Exchanges. An exchange cannot be an insurer, but will provide eligible individuals and small businesses with access to insurers plans in a comparable way. The exchange will consist of a selection of private plans as well as multi-state qualified health plans, administered by the Office of Personnel Management. Individuals will only be eligible to enroll in an exchange plan if they are not enrolled in Medicare, Medicaid, or acceptable employer coverage as a full-time employee. Based on income, certain individuals may qualify for a tax credit toward their premium costs and a subsidy for their costsharing; the credits and subsidies will be available only through an exchange. States will have the flexibility to establish basic health plans for low-income individuals not eligible for Medicaid. Individual and small group coverage will be allowed to be offered through nonprofit, member-run health insurance companies. Such nonprofit insurers will be eligible for grants and loans distributed through the new Consumer Operated and Oriented Plan (CO-OP) program. Congressional Research Service

5 Overview of the Patient Protection and Affordable Care Act The Patient Protection and Affordable Care Act (P.L , PPACA) was signed into law on March 23, On March 30, 2010, PPACA was amended by P.L , the Health Care and Education Reconciliation Act of This report summarizes the key provisions in PPACA (hereafter referring to PPACA as amended by P.L ) that affect private health insurance. With respect to the private health insurance market, mostly by full implementation in 2014, PPACA focuses on restructuring the market (particularly the small-group and nongroup markets), setting minimum standards for health coverage, and providing financial assistance to certain individuals and, in some cases, small employers. Overall, the law includes the following provisions: Beginning in 2014, individuals will be required to maintain health insurance, and certain employers with more than 50 full-time equivalent employees (FTEs) will be required to pay a penalty, with some exceptions. Several market reforms will be made, such as prohibition against lifetime benefit limits and coverage for preexisting health conditions. By 2014, either a state will establish separate exchanges to offer individual and small-group coverage, or the Secretary of Health and Human Services (hereafter referred to as the Secretary or HHS Secretary unless noted otherwise) will contract with a nongovernment entity to establish and operate exchanges in states that do not establish them. Exchanges will not be insurers but will provide eligible individuals and small businesses with access to private plans in a comparable way. The exchange will consist of a selection of private plans as well as multi-state qualified health plans, administered by the Office of Personnel Management (OPM). Beginning in 2014, certain individuals with incomes below 400% of the federal poverty level may qualify for credits toward their premium costs and for subsidies towards their cost-sharing. This financial assistance will be available only through exchanges. States will be provided the flexibility to establish basic plans for low-income individuals not eligible for Medicaid. Existing plans offered by employers as well as plans offered in the nongroup market will be grandfathered. New plans may also be sold in both the individual and group market outside of an exchange. Individual and small group coverage will be allowed to be offered through nonprofit, member-run health insurance companies. Congressional Research Service 1

6 Congressional Budget Office and Joint Committee on Taxation Analysis On March 20, 2010, the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) provided their final estimate of the direct spending and revenue effects of PPACA (as amended by P.L ). 1 CBO projects that PPACA will reduce federal deficits by $143 billion over the 10-year period of and, by 2019, will insure 94% of the nonelderly, legally present U.S. population. According to the CBO, the gross 10-year cost of the exchange subsidies ($464 billion), increased federal Medicaid and CHIP outlays ($434 billion), and tax credits for small employers ($40 billion) will total $938 billion. These costs will be partially offset by $150 billion over the 10-year budget window, from four sources: net revenues from the excise tax on high-premium insurance plans ($32 billion); penalty payments by uninsured individuals ($17 billion); penalty payments by employers whose workers received subsidies via the exchanges ($52 billion); and other budgetary effects, mostly on tax revenues, associated with the expansion of federally subsidized insurance ($48 billion). Taking into account these offsets, the net cost of the coverage provisions, according to the CBO analysis, would be $788 billion over 10 years. According to CBO, these costs are more than offset by other PPACA changes affecting direct spending and revenues. For additional information on these revenue provisions, see CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act (PPACA). Overview of Report This report summarizes key provisions affecting private health insurance in PPACA. 2 Most of the provisions will be effective beginning in Provisions effective prior to 2014 are described in the next section and are listed in Appendix A on immediate reforms. The private health insurance provisions in this report are presented under the following topics, with the primary CRS contact listed for each: Individual mandate and employer requirements: the mandate for individuals to maintain health insurance and any requirements for employers. [Hinda Chaikind, ] Private health insurance market reforms. [Bernadette Fernandez, ] Exchange [Chris Peterson, ], through which the following two items can only be offered: Multi-state qualified health plans. [Hinda Chaikind, ] 1 The March 20, 2010, estimate is available at Manager'sAmendmenttoReconciliationProposal.pdf. 2 This report does not discuss quality, wellness, administrative simplification, and other titles of PPACA, which are addressed in other CRS reports. Congressional Research Service 2

7 Premium subsidies. [Chris Peterson, ] Immediate Individual and Group Market Reforms and Consumer Operated and Oriented Plan Health Care Cooperatives. [Mark Newsom, ] Immediate Individual and Group Market Reforms PPACA requires implementation of a number of reforms in both the individual and group markets prior to the full implementation date for many other insurance reforms (January 1, 2014). 3 These reforms include the following, in the order in which they would become effective (see Appendix A for additional details and Appendix B for a chronology of implementation deadlines): authorizing the Secretary to award grants to states to provide information and assistance to health insurance consumers; establishing a process for the annual review of unreasonable premium increases; providing coverage assistance for those who are uninsured because of a preexisting condition; creating a temporary re-insurance program to support coverage for early retirees; establishing an Internet portal to assist consumers in identifying coverage options; prohibiting lifetime limits and restricted annual limits on essential benefits; 4 prohibiting rescissions of health insurance policies; requiring coverage of preventive services and immunizations; extending dependent coverage up to age 26; prohibiting discrimination based on salary with respect to eligibility for benefits; capping insurance company non-medical, administrative expenditures; ensuring that consumers have access to an effective appeals process; providing coverage for preexisting health conditions for enrollees under age 19; ensuring patient protections regarding the choice of a primary care provider, access to emergency services and obstetrical and gynecological care, and access to medical reimbursement data; requiring the Secretary to develop uniform summary of benefits documents so consumers can make easier comparisons when shopping for health insurance; 3 The use of the term immediate to describe the first set of insurance reforms complies with statutory language; the heading for Subtitle A of P.L is Immediate Improvements in Health Care Coverage for All Americans. However, most of these immediate reforms actually become effective after the date of enactment. 4 Per 10101, the Secretary must define the scope of restricted annual limits. Congressional Research Service 3

8 facilitating administrative simplification to lower health system costs; and tasking the Secretary with developing requirements for quality of care. In addition to the immediate reforms in PPACA, there are other private insurance reforms that were not identified as immediate but nonetheless become effective prior to 2014; those reforms include the following, in the order in which they would become effective (see Appendix A for additional details concerning implementation deadlines): grandfathering of existing group and individual health plans; availability of small business tax credits; awarding of grants to employers to establish workplace wellness programs; availability of medical malpractice demonstration grants; determination made by the Secretary whether states have met requirements to establish their own exchange; and awarding of loans and grants to applicants to the consumer operated and oriented plan (CO-OP) program. Health Insurance Terms Defined Under PPACA PPACA will establish new health insurance plans and define existing health insurance terms. New health plans include the following: A qualified health plan (QHP) will be a health plan that is certified as meeting a specified list of requirements related to marketing, choice of providers, plan networks, and other features, or is recognized by each exchange through which such plan is offered; and provides the essential health benefits package (defined below; see Essential Health Benefits Package ). A QHP issuer must be licensed and in good standing with each state in which it offers coverage; must offer at least one QHP each providing silver and gold levels of coverage (levels described below; see Levels of Coverage ); must charge the same premium for a plan regardless if it is offered in or out of the exchange (including through an insurance agent); and must comply with regulations applicable to exchanges. QHPs will include qualified health plans offered through the CO-OP program (described below; see Consumer Operated and Oriented Plan (CO-OP) ). A standard health plan will be a plan established and maintained by the state under which eligible individuals are residents of the state who are not eligible to enroll in Medicaid; whose household income exceeds 133% but does not exceed 200% of the poverty line for the size of the family involved; who are not eligible for minimum essential coverage (as defined in section 5000A(f) of 23 the Internal Revenue Code of 1986); or are eligible for an employer-sponsored plan; and have not attained the age of 65 as of the beginning of the plan year. Such a plan will provide coverage equal to at least the essential health benefits (described below), and have a medical loss ratio 5 of at least 85%. 5 A medical loss ratio refers to the percentage of premiums collected by an insurer that is used to pay medical claims. Congressional Research Service 4

9 PPACA defines several terms applicable to private health insurance including the following: Health plan refers to health insurance coverage offered to individuals and groups, not including self-insured plans and multiple employer welfare arrangements (MEWAs) 6 not subject to state law. Group health plan refers to a plan that provides medical care to employees or their dependents, including self-insured plans. MEWAs could be considered group health plans for the purpose of private health insurance requirements under PPACA. Grandfathered plan refers to a health plan or health insurance coverage in which an individual is enrolled in on the date of enactment (March 23, 2010). Grandfathered plans (1) include plans that are renewed after this date; (2) allow for enrollment of family members, if such enrollment is permitted under the terms of the plan in effect on the date of enactment; and (3) allow for enrollment of new employees (and their families). 7 Minimum essential coverage (i.e., coverage required to fulfill the individual mandate) is defined as coverage under Medicare part A, Medicaid, the Children s Health Insurance Program (CHIP), Tricare, 8 the TRICARE for Life program, the veteran s health care program, the Peace Corps program, a government plan (local, state, federal) including the Federal Employees Health Benefits Program (FEHBP) and any plan established by an Indian tribal government, any plan offered in the individual, small group or large group market, a grandfathered health plan, and any other health benefits coverage, such as a state health benefits risk pool, as recognized by the HHS Secretary in coordination with the Treasury Secretary. Essential health benefits package refers to health insurance coverage that will provide essential health benefits, will not exceed out-of-pocket and deductible limits specified in the law, and will not impose a deductible on preventive services. Essential health benefits refers to categories of benefits specified in the law (described below) which will be provided in an essential health benefits package. 6 The Employee Retirement Income Security Act defines a multiple employer welfare arrangement as an employee welfare benefit plan or other arrangement that is established and maintained to provide specified benefits, including health insurance coverage, to the employees of two or more employers. MEWAs may not include plans covering collective bargaining agreements, rural electric cooperative and rural telephone cooperative associations. Conceptually, MEWAs are designed to give small employers the ability to purchase low cost health coverage on terms similar to those available to large employers. For additional information about MEWAs, see U.S. Department of Labor, Employee Benefits Security Administration, Fact Sheet: MEWA Enforcement, April 2009, available at 7 For additional descriptions of grandfathered plans, see CRS Report R41166, Grandfathered Health Plans Under the Patient Protection and Affordable Care Act (PPACA). 8 Tricare was added in H.R. 4887, as passed by both the House (March 20, 2010) and the Senate (April 12, 2010). Congressional Research Service 5

10 Individual Mandate and Employer Requirements Individual Mandate Beginning in 2014, PPACA includes a mandate for most individuals to have health insurance, 9 or potentially pay a penalty for noncompliance. 10 Individuals will be required to maintain minimum essential coverage for themselves and their dependents. Those who do not meet the mandate will be required to pay a penalty for each month of noncompliance. The penalty will be calculated as the greater of either (1) a percentage of the amount by which household income exceeds the personal exemption for the applicable tax year 11 ( applicable income ) or (2) a flat dollar amount assessed on each taxpayer and any dependents (e.g., family), with the total penalty for a family capped at 300% of the flat dollar amount. The percentage penalty amount based on applicable income will be 1.0% in 2014, 2.0% in 2015, and 2.5% thereafter. The annual flat dollar amount will be phased in $95 in 2014, $325 in 2015, and $695 in 2016 and beyond (adjusted for inflation), assessed for each taxpayer and any dependents, up to the family cap. The flat dollar amount will be reduced by one-half for dependents under the age of 18. Finally, the penalty for noncompliance cannot exceed the national average premium for bronze-level qualified health plans offered through exchanges (for the relevant family size). Some individuals will be provided with subsidies beginning in 2014 to help pay for their premiums and cost-sharing. (A complete description of who is eligible and the amount of subsidies is found in the section on Individual Eligibility for Premium Credits and Cost-sharing Subsidies). Others will be exempt from the individual mandate, including those with qualifying religious exemptions, those in a health care sharing ministry, individuals not lawfully present in the United States, and incarcerated individuals. No penalty will be imposed on those without coverage for less than 90 days (with only one period of 90 days allowed in a year), members of Indian tribes individuals whose household income is less than the personal exemption amount for the applicable tax year, or any individual who the Secretary of HHS determines to have suffered a hardship with respect to the capability to obtain coverage under a QHP. Additionally, individuals whose required contribution 12 for a calendar year exceeds 8% of household income 13 will be exempt from the penalty. After 2014, the 8% will be adjusted to reflect the excess rate of premium growth and the rate of income growth for the period. Certain individuals who would otherwise be subject to the mandate, but are residing outside of the United States, as well as bona fide residents of any possession of the United States will be considered to have minimum essential coverage and therefore not subject to the penalty (b) as amended by (b) of P.L and by 1002 of P.L of P.L includes congressional findings that address the constitutionality of an individual mandate to obtain health insurance. For more information on this issue, see CRS report, CRS Report R40725, Requiring Individuals to Obtain Health Insurance: A Constitutional Analysis, by Jennifer Staman and Cynthia Brougher. 11 For example, for tax year 2010, the personal exemption amount is $3, Required contribution is defined as (1) in the case of an individual eligible to purchase minimum essential coverage through an employer (other than through the exchange), the portion of the annual premium that is paid by the individual for self-only coverage, or (2) or for individuals not included above, the annual premium for the lowest cost bronze plan available in the individual market through the exchange in the State in which the individual resides, reduced by the amount of the premium credit for the taxable year. 13 Household income is defined as the modified gross income of the taxpayer, plus the aggregate modified gross income of all other individuals for whom the taxpayer is allowed a deduction for personal exemptions for the taxable year. Congressional Research Service 6

11 Taxpayers who are required to pay a penalty but fail to do so will receive a notice from Internal Revenue Service (IRS) that they owe the penalty. If they still do not pay the penalty, the IRS can attempt to collect the funds by reducing the amount of their tax refund in the future. However, individuals who fail to pay the penalty will not be subject to any criminal prosecution or penalty for such failure. The Secretary can not file notice of lien or levy on any property for a taxpayer who does not pay the penalty. Members of Congress and their staff can enroll only in health plans created under this Act or offered through an exchange. This provision applies only to those congressional staff who are full- and part-time employees employed by the official office of a Member of Congress. 14 Employer Requirements PPACA does not mandate an employer to provide employees with coverage; however, beginning in 2014, it does impose requirements on certain employers. 15 An employer with at least 50 fulltime equivalents 16 (FTEs) that does not provide coverage may be subject to a penalty if at least one of its full-time employees receives a premium credit. An employer with at least 50 FTEs that provides access to coverage but fails to meet certain requirements may also be subject to a penalty. The number of FTEs excludes those full-time seasonal employees who work for less than 120 days during the year. The penalty for an applicable employer who provides coverage is similar to the penalty assessed against an employer who does not provide coverage. An employer may be subject to a penalty only in relation to its full-time workers, defined as those working an average of at least 30 hours per week. An employer is not subject to a penalty in relation to its part-time workers (those working less than an average of 30 hours per week). For additional information besides that provided below, see CRS Report R41159, Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care Act (PPACA). Requirements and Penalties for an Employer Offering Health Insurance For an employer that chooses to offer health insurance, the following rules would apply: Current employment-based plans will be considered grandfathered plans. A small employer may offer full-time employees and their dependents coverage in an exchange plan. A large employer may offer full-time employees the opportunity to enroll in a group health plan. An employer will not be treated as meeting the employer requirements if at least one full-time employee receives premium credits in an exchange plan because 14 For additional information, see CRS Congressional Distribution (CD) memorandum Analysis of 1312(d)(3)(D) of P.L , The Patient Protection and Affordable Care Act, and its Potential Impact on Members of Congress and Congressional Staff, by Jennifer A. Staman, Todd B. Tatelman and Ida Brudnick, April 2, 2010, available upon request from the memorandum s authors (a) as amended by (e-g) of P.L and by 1003 of P.L The calculation of FTEs for any month includes (1) the number of full-time employees (defined as those working an average at least 30 hours per week), and (2) the aggregate number of hours of service of employees who are not fulltime, divided by 120. Congressional Research Service 7

12 the employee s required contribution for self-only coverage exceeds 9.5% of the employee s household income or if the plan offered by the employer pays for less than 60% of covered health care expenses. 17 An employer must file a return providing the name of each individual for whom they provide the opportunity to enroll in minimum essential coverage, the length of any waiting period, the number of months that coverage was available, the monthly premium for the lowest cost option, the plan s share of covered health care expenses paid for, the number for full-time employees, the number of months employees were covered (if any), and any other information required by the Secretary. 18 The employer must provide notice to employees about the existence of the exchange, including a description of the services provided by the exchange. 19 An employer will not pay a penalty for any part-time workers (those working less than 30 hours), even if that employee receives a premium credit. In 2014, the monthly penalty assessed to the employer for each full-time employee who receives a premium credit will be one-twelfth of $3,000 for any applicable month. However, the total penalty for an employer will be limited to the total number of the firm s full-time employees minus 30, multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty amounts will be indexed by a premium adjustment percentage for the calendar year. Finally those firms with more than 200 full-time employees that offer coverage will automatically enroll new full-time employees in a plan (and continue enrollment of current employees). 20 Automatic enrollment programs will be required to include adequate notice and the opportunity for an employee to opt out. Requirements and Penalties for an Employer Not Offering Health Insurance A firm with at least 50 FTEs that chooses not to offer health insurance to its full-time employees (and their dependents) will be subject to a penalty if any of its full-time employees receive premium credits in an exchange plan. In 2014, the penalty assessed to the employer will be equal to the number of full-time employees minus 30 multiplied by one-twelfth of $2,000, for any applicable month. After 2014, the penalty payment amount would be indexed by a premium adjustment percentage for the calendar year. Employers that do not offer coverage must also file a return stating that they do not offer coverage, the number of full-time employees, and other information required by the Secretary. They must provide notice to employees about the existence of the exchange, including a description of the services provided by the exchange of P.L as amended by 1001(a)(2)(A) of P.L of P.L of P.L of P.L For additional information, see CRS Report R41159, Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care Act (PPACA). Congressional Research Service 8

13 Free Choice Vouchers An employer offering minimum essential coverage who pays any portion of the costs of such plan will provide free choice vouchers to each qualified employee. 22 A qualified employee is defined as an employee whose required contribution to the employer plan, for self-only coverage, is greater than 8% and less than 9.8% of the employee s household income for the taxable year, whose household income is not greater than 400% of the FPL for the relevant family size, and who does not participate in the plan offered by the employer. Beginning after 2014, the 8% and 9.8% would be indexed by the rate of premium growth. The amount of a voucher will be equal to the monthly portion of the cost of the employer plan that would have been paid by the employer if the employee were covered under the plan for which the employer pays the largest portion of plan costs, for either self or, if elected by the employee, family coverage. An exchange will credit the amount of a voucher to the monthly premium of a qualified health plan in which the qualified employee is enrolled, and the employer will pay the exchange the credited amount. If the amount of the voucher exceeds the premium, the excess will be paid to the employee. An individual receiving a free choice voucher will not be eligible for the exchange premium credits or cost-sharing subsidies described later in this report. 23 No penalty will be imposed on an employer with respect to any employee who is provided with a voucher. Small Business Tax Credit Certain small businesses are currently eligible for a tax credit 24 toward a share of their cost of health insurance coverage. In each of the four years 2010 through 2013, the full (or maximum) credit will cover up to 35% of a qualified for-profit employer s contributions 25 to health insurance, and 25% of nonprofit employers contributions to premiums. Beginning in 2014, for for-profit employers, the maximum credit is 50% of the employer s contribution 26 toward of P.L Individuals with free choice vouchers are explicitly ( 10108(h)(1)) ineligible for premium credits and cost-sharing subsidies available to certain low- and middle-income individuals enrolled in exchange plans discussed later in this report. Individuals who are eligible for employer-sponsored coverage may only obtain premium credits (beginning in 2014) for exchange plans if the employee s required contribution for self-only coverage exceeds 9.5% of the employee s household income or if the plan offered by the employer pays for less than 60% of covered health care expenses. Thus, for example, it may be the case that an individual in 2014 eligible for employer-sponsored coverage in which he or she pays 9.0% of income toward premiums will initially seem eligible for premium credits if the plan pays for less than 60% of covered health care expenses. However, the employer is then required to provide a free choice voucher, which would make the individual ineligible for the premium credits and cost-sharing subsidies as amended by (e) of P.L For , the employer contribution for the year will be calculated as the lesser of (1) the employer s actual premium contribution, or (2) the contribution the employer would have made if each of those same employees had enrolled in a plan with a premium equal to the average premium (determined by the Secretary of Health and Human Services (HHS)) for the small group market in the state, or area in the state, in which the employer offers health insurance. Any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer. 26 Beginning in 2014, the employer contribution will be calculated as the lesser of (1) the employer premium contribution toward qualified health plans (QHPs) offered by the employer through an exchange, or (2) the contribution (continued...) Congressional Research Service 9

14 premiums and 35% of employer contributions for nonprofit organizations. The small business tax credit that is available beginning in 2014 is only available to an employer for two consecutive tax years. The full credit is available to those employers with 10 or fewer full-time equivalent employees with average taxable wages are $25,000 or less. The credit is phased out as the number of FTEs increases from 10 to 25 and as average employee compensation increases from $25,000 to $50, For nonprofit (tax-exempt) organizations, the credit will be in the form of a reduction in income and Medicare tax the employer is required to withhold from employees wages and the employer share of Medicare tax on employees wages (with the credit thus limited by these amounts). For all other qualifying employers, it will be in the form of a general business credit. This type of credit is not refundable, but is limited by the for-profit employer s actual tax liability. In other words, if a for-profit company had a year in which it ended up paying no taxes (i.e., it had no taxable income, after accounting for all its other deductions and credits), then the small business tax credit could not be used for that year; there would be no income tax for this credit to reduce. However, as a general business credit, an unused credit amount can generally be carried back for one year 28 and carried forward up to 20 years. For more information, see CRS Report R41158, Summary of Small Business Health Insurance Tax Credit Under the Patient Protection and Affordable Care Act (PPACA). Private Health Insurance Market Reforms Besides the immediate reforms previously mentioned, PPACA also will establish new federal standards applicable to private health insurance coverage primarily after full implementation in These standards will affect private health insurance in the individual, small group, and large group markets, depending on the standard. These standards will impose new requirements on states related to the allocation of insurance risk, modify the current state-based regulatory system applicable to private plans, and require coverage for specified categories of benefits. Before 2016, states will have the option to define small employers either as those with (1) 100 or fewer employees, or (2) 50 or fewer employees. Beginning in 2016, small employers will be defined as those with 100 or fewer employees. A large employer will be an employer that had an average of at least 101 employees the preceding calendar year and at least one employee on the first day of the plan year. 30 States will be required to uniformly apply any standard or requirement it adopts under the private health insurance provisions of PPACA. (...continued) the employer would have made if each of those same employees had enrolled in a QHP with a premium equal to the average (determined by the HHS Secretary) for the small group market in the rating area in which the employee enrolls for coverage. 27 Beginning in 2014, these dollar amounts would be increased by the Consumer Price Index (CPI). 28 For 2010 only, the credit cannot be carried back one year, because it is first available for tax years after December 31, Beginning in 2011 and thereafter, it can be carried back one year, as part of the general business credit. 29 Most of the private health insurance provisions amend Title XXVII of the Public Health Service Act (PHSA, 42 U.S.C. 300gg et seq.). Title XXVII includes requirements on health insurance coverage for both the group and nongroup markets, enforcement applicable to such requirements, relevant definitions, and other provisions (b). Congressional Research Service 10

15 PPACA will establish qualified health plans (QHPs), a type of new health plan subject to a specified list of requirements related to marketing, choice of providers, plan networks, essential benefits, and other features. A QHP issuer will be licensed and in good standing with each state in which it will offer coverage; will offer at least one QHP each providing silver and gold levels of coverage (described below); will charge the same premium for a plan regardless if it was offered in or out of the exchange (including through an insurance agent); and will comply with regulations applicable to exchanges. 31 Existing plans may continue to offer coverage as grandfathered plans in the individual and group markets. Enrollment in such plans will be limited to those who were currently enrolled, their families, or new employees and their families in the case of grandfathered employer-sponsored coverage. Enrollees could continue and renew enrollment in a grandfathered plan indefinitely. Grandfathered plans will still be subject to a number of insurance reforms. 32 Existing group plans subject to one or more collective bargaining agreements will be grandfathered until the date on which the agreement terminates, at which time the immediate reforms and private market reforms will apply. 33 Individual and Group Health Insurance Reforms The law will apply new federal health insurance standards to group health plans as well as health insurance coverage offered in the individual, small group, and large group markets (depending on the standard), effective for plan years beginning on or after January 1, Among the insurance reforms are provisions that will subject new plans to the following requirements: Prohibit group health plans (new and grandfathered) and issuers in the individual and group markets from excluding coverage for preexisting health conditions. 34 (A preexisting health condition is a medical condition that was present before the date of enrollment for health coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before such date. Excluding coverage for preexisting conditions refers to the case in which an applicant for coverage is offered a health insurance policy but that policy does not provide benefits for certain medical conditions.) Prohibit group health plans and issuers in the individual and group markets from basing eligibility for coverage on health status-related factors. 35 (Such factors include health status, medical condition (including both physical and mental illness), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence), disability, and any other health status-related factor determined appropriate by the Secretary). It will allow for the offering of For additional information about grandfathered plans, see CRS Report R41166, Grandfathered Health Plans Under the Patient Protection and Affordable Care Act (PPACA) and 1251 as amended by 10103(d)-(e) of P.L , and further amended by 2301 of P.L (new PHSA 2704) as amended by 10103(e) of P.L , and further amended by 2301 of P.L (new PHSA 2705). Congressional Research Service 11

16 premium discounts or rewards based on enrollee participation in wellness programs (described in Other Provisions section). Impose nondiscrimination requirements on group health plans and issuers in the individual and group markets with respect to participating health care providers and individuals enrolled in such coverage. 36 Prohibit group health plans, issuers in the group market, and grandfathered health plans from imposing a waiting period greater than 90 days. 37 (A waiting period refers to the time period that must pass before an individual is eligible to use health benefits.) Require individual and group health insurance issuers to offer coverage on a guaranteed issue and guaranteed renewal basis. 38 ( Guaranteed issue in health insurance is the requirement that an issuer accept every applicant for health coverage. Guaranteed renewal in health insurance is the requirement on an issuer to renew group coverage at the option of the plan sponsor [e.g., employer] or individual coverage at the option of the enrollee. Guaranteed issue and renewal alone would not guarantee that the insurance offered is affordable.) Require issuers in the individual and small group markets to determine premiums for such coverage using adjusted community rating rules. 39 ( Adjusted, or modified, community rating prohibits issuers from pricing health insurance policies based on health factors, but allows it for other key characteristics such as age or gender.) Under the law, premiums will vary based only on the following risk factors: self-only or family enrollment; rating area, 40 as specified by the state; age (by no more than a 3:1 ratio across age rating bands established by the Secretary, in consultation with the National Association of Insurance Commissioners (NAIC)), and tobacco use (by no more than 1.5:1 ratio). Require QHPs and issuers in the individual and small group markets to offer coverage that includes the essential health benefits package (see description below). 41 Prohibit health plans that provide the essential health benefits package from imposing annual cost-sharing requirements that exceed the out-of-pocket limits applicable to high deductible health plans (HDHPs) as defined under the health savings account (HSA) section of the IRC 42 beginning in Limits would be annually adjusted thereafter by rate of growth in health care premiums (new PHSA 2706) (new PHSA 2708), as amended by 10103(b) of P.L and by 2301(a) of P.L (new PHSA 2702, 2703) (new PHSA 2701). 40 As an example, some states have enacted rating rules in the individual and small group markets that include geography as a characteristic on which premiums may vary. In these cases, the state has established rating areas. Typically, states use counties or zip codes to define those areas (new PHSA 2707), For 2010, the out-of-pocket maximum for HSA-qualified HDHPs is $5,950 for single coverage and $11,900 for family coverage (c). Congressional Research Service 12

17 Reforms Related to Allocation of Insurance Risk PPACA includes provisions that will take into account the variation of insurance risk among plan enrollees and across health plans. Such provisions will Require any issuer in the individual or small group market to consider all enrollees in all plans offered by the issuer in the applicable market as members of a single risk pool, including enrollees not enrolled in such plans offered through the exchange. 44 ( Pooling refers to the insurance industry practice of pooling the insurance risk of individuals or groups in order to determine premiums.) States may also merge their individual and small group markets. Require each state to establish a reinsurance program for the individual market by no later than January 1, 2014, and lasting through ( Reinsurance typically is thought of as insurance for insurers. When issuing policies, an insurer faces the risk that the premiums it collects will not be sufficient to cover its expenses and generate profit. For a health insurer, unusually high health care claims could lead to significant financial loss. Reinsurance shifts the risk of covering such high expenses from the primary insurer to a reinsurer.) The law will require all health insurance issuers and third-party administrators (TPAs) of group health plans to contribute to a temporary reinsurance program for individual policies that is administered by a nonprofit reinsurance entity. The total contribution amounts will equal $12 billion in plan year 2014, $8 billion in 2015, and $5 billion in States could collect additional amounts from issuers. States will modify or terminate any existing high-risk pools to be consistent with the reinsurance provisions. Require the Secretary to establish and administer temporary risk corridors from 2014 through 2016, under which payments to QHPs in the individual and small group markets will be made according to applicable risk corridor rules, based on the program for regional participating provider organizations under Part D of the Medicare program. 46 ( Risk corridors refer to a mechanism which adjusts payments to plans according to a formula based on each plan s actual, allowed expenses in relation to a target amount. If a plan s expenses exceed a certain percentage above the target, the plan s payment is increased. Likewise, if a plan s expenses exceed a certain percentage below the target, the plan s payment is decreased.) Require each state to adopt a risk-adjustment model, established by the Secretary, to apply risk adjustment to health plans and issuers in the individual and small group markets. 47 ( Risk adjustment refers to a mechanism that adjusts payments to health plans to take into account the risk that each plan is bearing based on its enrollee population.) Plans with enrollment of less than average risk will pay an assessment to the state. States will provide payments to plans with higher than average risk (c) , as amended by 10104(r) of P.L Congressional Research Service 13

18 Essential Health Benefits Package The Secretary will specify the essential health benefits included in the essential health benefits package that QHPs will be required to cover (effective beginning in 2014). Essential health benefits 48 will include at least the following general categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness and chronic disease management; and pediatric services, including oral and vision care. Coverage provided for the essential health benefits package will provide bronze, silver, gold, or platinum level of coverage (described below). 49 A health plan providing the essential health benefits package will be prohibited from imposing an annual cost-sharing limit that exceeds the thresholds applicable to HSA-qualified HDHPs. 50 Small group health plans providing the essential health benefits package will be prohibited from imposing a deductible greater than $2,000 for self-only coverage, or $4,000 for any other coverage in 2014 (annually adjusted thereafter). 51 Such limits will be applied in a manner that will not affect the actuarial value of any health plan, 52 including a bronze level plan (described below). Consistent with the immediate reforms described above, plans providing the essential health benefits package will be prohibited from applying a deductible to preventive health services. 53 PPACA will require the Secretary to define and periodically update coverage that provides essential health benefits. The Secretary will ensure that the scope of essential health benefits is equal to the scope of benefits under a typical employer-provided health plan (as certified by the Chief Actuary of the Centers for Medicare and Medicaid Services). 54 A health plan will be (b) (d) (c). 51 Ibid. 52 Actuarial value is a summary measure of a health plan s benefit generosity. It is expressed as the percentage of medical expenses estimated to be paid by the insurer for a standard population and set of allowed charges. For a background discussion about actuarial value, see CRS Report R40491, Setting and Valuing Health Insurance Benefits, by Chris L. Peterson (c) (b). Congressional Research Service 14

19 allowed to provide benefits in excess of the essential health benefits defined by the Secretary. 55 However, if a state requires such additional benefits in QHPs, the state must reimburse individuals for the additional costs of those benefits. 56 Levels of Coverage Beginning in 2014, PPACA will generally require QHPs to provide coverage at one of the following levels: bronze, silver, gold, or platinum. This requirement will apply regardless of whether or not the QHP is offered through an exchange (and premiums must be the same for QHPs inside and outside of the exchange). Excluding dental-only plans, health insurance issuers must offer a silver plan and a gold plan in the exchange. Each coverage level will be based on a specified share of the full actuarial value of the essential health benefits (see Figure 1). A health insurance issuer that offers coverage in any of these four levels will be required to offer the same level of coverage in a plan specifically designed for individuals under age Figure 1. Actuarial Values for Levels of Coverage Provided by Qualified Health Plans Actuarial value of essential health benefits 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 90% 80% 70% 60% Bronze Silver Gold Platinum Source: CRS analysis of the Patient Protection and Affordable Care Act. Another plan option permitted under PPACA in 2014 is a catastrophic plan. A catastrophic plan will provide coverage for essential health benefits and have deductibles equal to the amounts specified as out-of-pocket limits for HSA-qualified HDHPs. Such deductibles will not apply to at least three primary care visits. A catastrophic plan will be permitted only in the individual market (1) for young adults (those under age 30 before the plan year begins), and (2) for those persons (b)(5) (d)(3)(B), as amended by 10104(e) (d). Congressional Research Service 15

20 exempt from the individual mandate because no affordable coverage is available or they have a hardship exemption. 58 Consumer Operated and Oriented Plan (CO-OP) The creation of new health insurance cooperatives will be encouraged primarily through the distribution of $6 billion in funding under the Consumer Operated and Oriented Plan (CO-OP) program. 59 The Secretary will use the funds to foster the creation of new nonprofit member-run health insurance issuers that offer QHPs in the individual and small group markets. 60 Federal funds will be distributed as loans for start-up costs and grants for meeting solvency requirements. The funds must ultimately be repaid. 61 PPACA will require the Secretary to make grant and loan awards no later than July 1, 2013, after taking into account the recommendations of the advisory board. 62 The Secretary will make grant and loan awards giving priority to applicants that offer QHPs on a statewide basis, that use an integrated care model, and have significant private support. The Secretary will ensure that there is sufficient funding to establish at least one qualified nonprofit health insurance issuer in each state and the District of Columbia. If no health insurance issuer applies within a state, the Secretary will use funds for the program to award grants to encourage the establishment of qualified issuers within the state or the expansion of an issuer from another state to the state with no applicants. Grantees will enter into agreements with the Secretary to follow the provisions of PPACA, and any regulations promulgated by the Secretary. The agreement will include prohibitions for the use of loan or grant funds for carrying on propaganda, or otherwise attempting, to influence legislation; or for marketing. 63 The law will define a qualified nonprofit health insurance issuer as an organization meeting the following requirements: It must be organized as a nonprofit, member corporation under state law. It must not be an existing organization that provides insurance as of July 16, 2009, and must not be an affiliate or successor of any such organization (e) , as amended by 10104(l). 60 The definition in 1301 requires that a health insurance issuer offer at least one QHP at the silver and gold levels in an exchange, but not all its offerings will be required to participate in the exchange. 61 Not later than July 1, 2013, and prior to awarding loans and grants under the CO-OP program, the Secretary will promulgate regulations with respect to the repayment of loans and grants in a manner that is consistent with state solvency regulations and other similar state laws that may apply. In promulgating such regulations, the Secretary will provide that such loans will be repaid within 5 years and such grants will be repaid within 15 years, taking into consideration any appropriate state reserve requirements, solvency regulations, and requisite surplus note arrangements that must be constructed in a state to provide for such repayment prior to awarding such loans and grants ( 10104(l)). 62 The advisory board will consist of 15 members appointed by the Comptroller General by June 23, 2010, and will be subject to ethics and conflict of interest standards protecting against insurance industry involvement and interference. Board members will receive no compensation, but will be reimbursed for their travel expenses. The board will terminate when it completes its duties, or on December 31, 2015, whichever comes first (b)(2)(C)(ii). Congressional Research Service 16

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